Federal Debt projections
Background: This is the fourth post in a series looking at U.S. government debt. In previous posts I considered the official U.S. Federal debt ($10 Tr.), the liabilities for "entitlements" ($6 Tr. over the next 12 years) and other liabilities ($4.5 Tr). The official debt is over 60% of GDP. Adding entitlements, we're at 100% of GDP. Adding it all, we are nearer 150% of GDP.
These levels are high, but the bigger issue is that there is no plan to change this trend. Neither major political party has any plans to reduce the debt in the next decade.
Under current plans, we will add another $9 Tr. in debt. over the next 12 years. The U.S. is planning to go bankrupt, some time in the future.
Crying wolf? But, haven't we heard all this before? In the 1970s, people were already warning about U.S. debt levels, and in the 1980's and 1990s. So, isn't the fear of bankruptcy just "crying wolf"?
Historical debt levels: This graph shows the historical Taxes, Spending and Debt to public of the U.S., expressed as a percent of GDP.
The green debt line shows that the trend in debt has been getting worse. After a brief respite during the dot.com days, debt-to-GDP has continued its upward trend. This could go on for a while. Japan's experience shows that it can go on for two decades. So, while it is "crying wolf" to say that a collapse is just around the corner, it is accurate to say that we are planning for it: though we cannot say how far out.
It is almost common knowledge that Medicare, Medicaid a Social security are unsustainable as currently designed. There are even plans from both parties to make them last a little longer, to postpone the date of reckoning. Yet, neither party dares to make such plans a central focus of the coming election. This tells me that voters still do not want to tackle this problem. Voters still want to evade... at least for one more election, even though they know the problem gets worse every year.
GDP Growth: Look at the mid-1970's, where spending started to be a few percent more than taxes. This gap is an annual build-up of debt. Notice how debt rose consistently as the gap remained, until the dot.com bubble. However, also notice how debt (as a % of GDP) fell sharply in the late 1990s. Taxes did rise above spending, but only very briefly: not enough to explain this drop. This sharp drop illustrates how rising nominal GDP can lower the debt as a percentage of GDP. When nominal GDP rises faster than the rise in debt, the level of debt comes down -- as a % of GDP.
This effect is best illustrated by the post-WW2 period. Look at the 1950's and 1960s'. Relative to that war and to today, the U.S. ran a nearly-balanced budget. The growth of debt was significantly less than the growth of GDP, causing debt to plummet as a percent of GDP.
Current budget: Here are the projections if voters do nothing to change their country. These are numbers from the Congressional Budget Office, not from some street-corner rabble-rouser. Notice how WW-II looks dwarfed. Notice how we will be back to WW-II levels of Debt-to-GDP before 2030.
This is not a forecast. It is a description of the current plan. (It is important to point out here that I do not expect soaring consumer prices or a plummeting dollar over the next few years. In many ways, my views for the short-term are just the opposite.)
What can change? Mathematically, there are basically three ways to bring down the Debt-to-GDP ratio:
These levels are high, but the bigger issue is that there is no plan to change this trend. Neither major political party has any plans to reduce the debt in the next decade.Under current plans, we will add another $9 Tr. in debt. over the next 12 years. The U.S. is planning to go bankrupt, some time in the future.
Crying wolf? But, haven't we heard all this before? In the 1970s, people were already warning about U.S. debt levels, and in the 1980's and 1990s. So, isn't the fear of bankruptcy just "crying wolf"?
Historical debt levels: This graph shows the historical Taxes, Spending and Debt to public of the U.S., expressed as a percent of GDP.
The green debt line shows that the trend in debt has been getting worse. After a brief respite during the dot.com days, debt-to-GDP has continued its upward trend. This could go on for a while. Japan's experience shows that it can go on for two decades. So, while it is "crying wolf" to say that a collapse is just around the corner, it is accurate to say that we are planning for it: though we cannot say how far out.
It is almost common knowledge that Medicare, Medicaid a Social security are unsustainable as currently designed. There are even plans from both parties to make them last a little longer, to postpone the date of reckoning. Yet, neither party dares to make such plans a central focus of the coming election. This tells me that voters still do not want to tackle this problem. Voters still want to evade... at least for one more election, even though they know the problem gets worse every year.
GDP Growth: Look at the mid-1970's, where spending started to be a few percent more than taxes. This gap is an annual build-up of debt. Notice how debt rose consistently as the gap remained, until the dot.com bubble. However, also notice how debt (as a % of GDP) fell sharply in the late 1990s. Taxes did rise above spending, but only very briefly: not enough to explain this drop. This sharp drop illustrates how rising nominal GDP can lower the debt as a percentage of GDP. When nominal GDP rises faster than the rise in debt, the level of debt comes down -- as a % of GDP.
This effect is best illustrated by the post-WW2 period. Look at the 1950's and 1960s'. Relative to that war and to today, the U.S. ran a nearly-balanced budget. The growth of debt was significantly less than the growth of GDP, causing debt to plummet as a percent of GDP.
Current budget: Here are the projections if voters do nothing to change their country. These are numbers from the Congressional Budget Office, not from some street-corner rabble-rouser. Notice how WW-II looks dwarfed. Notice how we will be back to WW-II levels of Debt-to-GDP before 2030.
This is not a forecast. It is a description of the current plan. (It is important to point out here that I do not expect soaring consumer prices or a plummeting dollar over the next few years. In many ways, my views for the short-term are just the opposite.)
What can change? Mathematically, there are basically three ways to bring down the Debt-to-GDP ratio:
- Cut spending
- Raise taxes
- Grow GDP faster that growing the debt
While anyone interested in reality-oriented economics should be reading Dr. Northrop Buechner’s book, Objective Economics, if you are thinking about the deficit there is another book to read. The importance of the deficit is the resulting debt. The amount of federal debt alone is reaching 100% of the GDP this year. Of course, any level isn’t a good thing, but a recent book gives us evidence that the 90% level is very dangerous. That work, “This Time is Different: Eight Centuries of Financial Folly”, is an exhaustive survey of past financial crisis. The authors are mainstream economists and do not understand much of what they are seeing. Their analysis is often superficial and concrete bound. They do not understand the difference between government force and voluntary actions. But the information they provide is so bluntly obvious that anyone can get the point. This book is influential. It is also pretty cheap from Amazon.
ReplyDeleteI agree about "This Time is Different". It is more of a research-paper, wrapped up in some commentary, to be more like a regular book. Nevertheless, the data they have pulled together is very useful for economists.
ReplyDelete